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Overhaul of Queensland security payment system - the new proposed 'fairness' system - 25 August 2017

Earlier this week, the Queensland Government introduced the Building Industry BIF (Security of Payment) Bill 2017 (BIF Bill) into parliament.

The BIF Bill is the result of the Government’s review of security of payment in the construction industry, following a series of high profile collapses in the industry. The BIF Bill has been referred to a parliamentary committee for review who will most likely call for submissions.

Should the BIF Bill become law, the construction industry needs to be prepared for significant change.

Proposed Changes

The BIF Bill proposes a number of changes, including (but not limited to) the following:

Implementation of a Project Bank Account (PBA) to be phased in over two stages.

Combining Acts that relate to securing payment into one Act. The existing Building and Construction Industry Payments Act 2004 (BCIPA) and the Subcontractors’ Charges Act 1974 (SCA) will be repealed and their amended provisions will be placed in the new Act.

Amendments to the Queensland Building and Construction Commission Act 1991 (QBCC Act).

Here is a short summary of some of the significant changes.

PBA

This is the most significant change and one which has been generally opposed by the property development sector.

PBAs are trust accounts, to be set up by the head contractor with the head contractor and subcontractors, as beneficiaries. The aim of a PBA is to ensure progress payments down the contractual chain to subcontractors in the event of head contractor insolvency.

PBAs will be introduced in two phases. Phase one will apply to government building and construction projects (excluding engineering projects such as bridges, roads and ports) of between $1 -$10 million commencing on 1 January 2018. Phase two will apply to all building and construction projects (but excluding engineering projects) valued over $1 million, commencing on 1 January 2019.

The BIF Bill will require the head contractor to set up a project bank account within 20 business days of entering into the first subcontract for the project.

All payments to be made by the principal to the head contractor are to be paid into the PBA.

The head contractor is permitted to withdraw an amount from the PBA in limited circumstances including, paying a subcontractor or paying to the head contractor an amount that the principal is liable to pay the head contractor but only to the extent that the head contractor is not also liable to pay a subcontractor for the same work. The head contractor must cover shortfalls where there is an insufficient amount to pay a subcontractor.

Retention amounts are paid into the PBA and the head contractor must ensure that the subcontractor, for which the retention amount is held for, is identifiable.

Whether or not the PBA process will work is yet to be seen. Although the purpose of PBAs is to provide greater security in events such as insolvency, the process adds more red tape to the payment process.

Changes to the BCIPA and the SCA – one combined Act

BCIPA

The BIF Bill proposes to repeal the BCIPA and create a new process for progress payments. The proposed changes to the current system include:

Claimants will no longer have to state on a progress claim, that the claim is made under the legislation.

Extension of the timeframes for making an adjudication application (but not an adjudication response) to up to 40 business days after a payment was due.

A new requirement that an adjudication application and adjudication response must not exceed the number or length of submissions, which is to be prescribed by regulations. This requirement limiting the volume of material is an effort to minimise the complexity of adjudications.

Removing the requirement for claimants to issue a ‘second chance’ notice. If a respondent fails to give a payment schedule, the respondent will become liable to pay the amount claimed. The claimant can either proceed to adjudication or recover the unpaid portion of the amount owed. The claimant may also suspend carrying out construction work, or supplying the related goods and services. It is therefore critical from a respondent’s perspective that it responds within the timeframes required by the BIF Bill.

If a contract is terminated, the date of termination will be deemed a reference date if the contract does not provide for, or purports to prevent, a reference date surviving beyond termination.

The right to a progress payment is not ‘from’ each reference date but is ‘for’ each reference date.

Removing the respondent’s ability to include ‘new reasons’ in an adjudication response if they were not included in a payment schedule which is currently permitted in relation to a ‘complex payment claims’ (for claims above $750,000).

The creation of an offence where a respondent fails to provide a payment schedule or fails to pay an adjudicated amount.

The proposed changes to the existing BCIPA regime largely favour claimants. Respondents should familiarise themselves with the proposed changes. A failure to do so may cause significant adverse consequences.

SCA

The BIF Bill proposes to repeal the SCA and place these provisions in a new Act. The intention of the BIF Bill is that it will improve usability of the SCA provisions by updating the language of the SCA (particularly because the SCA has been in place in Queensland since 1974).

The BIF Bill introduces a timeframe (10 business days) for when a contractor must respond to a request for information about a building contract or security. The BIF Bill creates an offence for failure to respond, because a contractor’s non-compliance has the potential to delay the decision of a subcontractor in regards to issuing a charge.

The BIF Bill also introduces a new requirement, where a contractor must provide a response within five business days of receiving a notice of claim of charge. Failure to respond is an offence.

QBCC Act Amendments

The BIF Bill proposes various amendments to the QBCC Act including; the introduction of licensing reforms in relation to influential and excluded persons in a response to concerns in the industry surrounding ‘phoenixing’.

The definition of an influential person is expanded upon to cover not only the role of the person, but also the function of the person. This is an attempt to provide cover for a variety of situations. An example of this would be where a person appoints their spouse as a director, but runs the company vicariously through their spouse, without being an officer of the company.

The definition of ‘excluded individual’ has been amended so that a person will be considered an ‘excluded individual’ if they were, within two years of a company’s failure, a director or influential person of the construction company.

Another significant amendment to the QBCC Act are the increased penalties for offences relating to unlicensed building work.

Summary

The BIF Bill proposes major changes to the construction industry. In particular, the introduction of PBAs and changes to the security of payment process for progress claims will have a significant impact upon the way in which the process of payment in a construction project is managed.

The BIF Bill will affect all players in the construction industry including developers, contractors and subcontractors. Consideration should also be given to the drafting of future contracts in light of the potential changes.